Intraday Update: Why the Mid-Terms Are More Important for the Markets This Year

The Dow Jones Industrial Average is sliding, the Nasdaq is rising and that tells you most of what you need to know about today. In today's Intraday Update, we...

•...look at the connection between Republican voter sentiment and the market; •...marvel at the gains in Micron Technology (MU) and Nvidia (NVDA); •...look at how high yields can go before hitting the stock market; •...consider the bullish and bearish arguments for Kroger (KR).

Why the Mid-Terms Matter for the Market

It's a quiet day for the markets, with the S&P 500 is little changed at 2785.50, while the Dow Jones Industrial Average has dropped 129.04 points, or 0.5%, to 25,206.70. The Nasdaq Composite has gained 0.5% to 7599.46.

So with little to catch our attention we thought we'd focus on something a little further out on the calendar: The mid-term elections. Historically, mid-term election years have been messy for the market. And this one could be even more important than most, writes, RBC strategist Lori Calvasina.

She notes that since the 2016 presidential election, the S&P 500 has been following sentiment among Republican voters higher. (In case you're wondering, there's a Bloomberg Consumer Comfort Index for Republicans, which measures that, and a Bloomberg Consumer Comfort Index for Democrats, as well.) But if higher markets are at least in part a reflection about Republicans feeling better about the state of the world, then a defeat in the mid-term elections could be a problem. "We think Republican sentiment would take a hit given its current lofty levels," Calvasina writes. "The relationship between Republican sentiment and the S&P 500 of late tells us this would likely be a problem for stocks."

Of course, the elections are still about eight months away. But don't be surprised if they start to matter more as they get closer.

Signet Jewelers (SIG) is down 3.9% after JPMorgan cut its price target on the stock to $52.

Treasuries: It's Not How High. It's How Fast.

It was nice while it lasted.

Friday's payroll report rekindled hopes of a "not to hot-not too cold" economy. But rising interest rates and escalating trade conflict have brought an end to the “Goldilocks” environment that dominated last year, writes Goldman Sachs strategist David Kostin.

That doesn't mean the markets' rally is over. Kostin writes that the S&P 500 can continue to log gains if the yield on the 10-year Treasury note rises at a monthly pace of less than 20 basis points--and if the yields remain below 4%.

For its part, Goldman Sachs is forecasting yields of 3.25% by the end of the year. Party on?

Bulls vs. Bears: Kroger Gets Crunched

The Setup:Kroger (KR) was the worst performing stock in the S&P 500 on Friday following its fourth-quarter earnings. But Friday's drop was nothing new for the Kroger, who's shares have tumbled 14% this year after dropping another 1.5% to $23.72 at 12:20 p.m. Monday, as the company struggles with changes to the grocery business brought on by the internet and Amazon.com's (AMZN) purchase of Whole Foods Market.

What the Bulls Say: Investors are wrong to think that the supermarket giant is down for the count, argues Jefferies analyst Christopher Mandeville, who contends that Kroger is making the right moves for the future. Yes, he admits that a lack of detail in the company's guidance leaves room for surprises--both good and bad. But Kroger's at an attractive risk-reward point, given its valuation--it trades at 11.3 times 12-month earnings estimates, below its five-year average of 14.6 times--and potential improvement in free cash flow and return on invested capital, writes Mandeville, who reiterated his Buy rating and cut his price target by $2 to $31.

What the Bears Say: Morgan Stanley's Vincent Sinisi isn't bearish so much as convinced that Kroger's stuck in place. In a note today, he argued that Kroger, which "remains the leading conventional operator" in the grocery space, has a plan for the future that includes rationalization, a better store experience, and expansion of its digital efforts. Unfortunately, that all comes with a "high degree of bottom line uncertainty," Sinisi. "As such, we remain cautious on the subsector and EW on KR on a balanced risk/reward profile."

What Barron's says: Ben Levisohn panned Kroger in the Trader column on June 10, 2017, when its shares traded at $30.78, and sees no reason to get bullish just. Maybe when it gets back to $20?

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